The Advantages Of Large-Scale Commercial Farming In Africa

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Cameroon Land Grab photo

African land is being bought up by foreigners at a record pace

AFRICANGLOBE – From the beginning of 2004, Ethiopia has witnessed a flurry of investments from all parts of the world into their farmlands.

Come 2011, land deals are already in place for 5,28,000 hectares, of which according to the Government of Ethiopia, 3,07,000 hectares of land have already been transferred to both foreign and domestic investors.

With the spur in foreign investments both in infrastructure and land banks, and a growing domestic economy, Ethiopia is today amongst one of the fastest growing economies in Africa and the world.

Encouraged by the attractive investment climate, Indian companies have committed investment amounting to $4.4 billion out of which 40 per cent is for commercial agriculture.

Investors ranging from Karuturi Global to conglomerates such as Emami, Shapoorji Pallonji & Co. etc. have acquired huge fertile tracts of land for initiating large scale commercial farming.

Large-Scale Commercial Farming

Ethiopia is not a one off case. Since the beginning of 2000, there has been a rising global interest in farmlands.

This has been fuelled by the volatility in commodity prices globally, growing human and environmental pressures, and worries about food security due to the rising demand for biofuels.

According to the FAO estimates, the global food demand will increase by 70 per cent in 2050, in order to feed an estimated global population of 9.3 billion.

There is rising interest in large-scale commercial farming opportunities, especially in the developing economies such as India where concerns on food security are further aggravated by stagnating yields and an increasing population.

Compared to an average annual expansion of global agricultural land of less than four million hectares before 2008, approximately 56 million hectares worth of large-scale farmland deals were announced even before the end of 2009.

More than 70 percent of such demands have been in Africa; countries such as Ethiopia, Mozambique, and South Sudan have transferred millions of hectares to investors in recent years.

Why Africa?

Africa offers immense opportunity in terms of investment in large-scale commercial farming. The main reasons are:

Availability of huge tracts of contiguous fertile land at modest prices.

Land prices in Africa are much lower than those in places such as India.

For instance, the land lease rate in Punjab’s Doaba region is a minimum of $800 for an acre whereas the average land lease rates in Africa comes to around $14/acre.

Due to the large size of the farms, it becomes much easier to go for mechanised farming in such plots, thereby, increasing farm efficiency, and administrative hassles of people management in a foreign land.

Gap in the potential and actual yields in Africa, thereby, providing a huge scope for further interventions (in terms of better seeds and improved farm technology).

Availability of labour at cheaper rates as compared to developing nations, therefore, having a direct implication on cost of production.

According to studies, the cost of agriculture production in Africa is almost half as compared to India. There is a lower requirement for agricultural inputs and labour is cheap, thereby, significantly reducing the cost of production.

Proximity of some of the African nations to West Asia, EU and the US, thereby, reducing freight costs and increasing cost competitiveness.

Africa is perhaps the world’s largest importer of rice, wheat, sugar, maize, soyabean and other staples. There is, therefore, a ready domestic market which is available for whatever is produced on these farms.

Pull Factors

Additionally there are strong “pull” factors for investors wishing to invest in agricultural production in Africa notably.

Liberalised norms of Governments of most of African nations for allocation of land to investors and limited bureaucratic hurdles; additional incentives such as duty-free imports, zero duty on exports, easy repatriation of profits etc.

Support from some Governments in terms of lending financial support through EXIM Bank, double taxation (avoidance) agreements (DTAs) and other bilateral trade agreements.

The land parcels are offered at competitive prices on lease hold which run from a minimum of 20 years to a maximum of up to 99 years.

Investment

A foreign investor needs a minimum capital investment of $50,000-1,00,000 (varies on a country-to-country basis). On an average, of the total project cost, almost 60 percent is on fixed asset, 30-35 per cent on pre-production (development) and about 6-10 per cent for working capital.

The returns from investments are more strategic from the long term point of view as most of the investment initially goes for asset creation.

These African ventures have a pay-back period of 7-8 years with a projected IRR of about 18-21 per cent and above, over a 10-year time span.

Capital infusion is required initially for a period of first 5-6 years after which the project becomes self sustainable.

Funding up to the extent of 70 per cent of project cost can be availed from different Developmental Banks in Africa.

Roadmap

Ideally to start off an individual (propriety concern) or an organisation needs to scan the different land banks in Africa based on certain criteria such as agro-climatic condition, soil, socio-economic-political situation, trade treaties and benefits etc.

Conduct surveys and studies such as environment impact study, topography, land quality assessment, logistical costs etc.

Take a decision on country-crop mix; risk assessment and risk profiling; preparation of detailed project report; completion of different Government formalities such as discussion of terms of agreement (MoU) etc. and the final implementation on ground.